How European companies are leading the Real Estate sector decarbonisation

Residential and commercial properties are responsible of about 24% of the world’s emissions, being either direct or indirect energy consumption in the buildings. The IEA scenarios estimate that the building sector will need to reach net-zero by 2050 to achieve the Paris Agreements’ targets. 

Massive efforts are needed to reach such ambitious goals, in particular when it comes to the existing building stocks: it is way easier to decarbonise construction rather than decarbonise a building already built. An important part of these efforts will have to come from companies – they own most of the commercial properties around the world and even a share of the residential buildings. This article suggests that European companies tend to perform better than their American and Asian counterparts. 

To assess the performance of Real Estate companies, two criteria were chosen: the first one being the Carbon Impact Analytics rating^[1], which assesses the global performance of the company and the second being the intensity of leased buildings of the company. 130 companies were analysed over these two criteria; the results are presented in this study.

EXPLANATION OF THE METHODOLOGY

The Carbon Impact Analysis (CIA) rating – X-axis

The Carbon Impact Analysis (CIA) rating , ranking from 1 to 15, aims to assess the level of contribution and exposition of a company to climate change. 

A company obtaining a 1 would have a business model that contributes to the transition to a low-carbon economy, while having a very low contribution to global warming, for instance because it emits very few emissions. On the other hand, a company obtaining a 15 would mean the company is highly exposed to climate change, and that its business model is unsuitable for the climate transition. 

For the Real Estate sector, a specific cap and floor have been implemented to include the sector’s climate specifications. In that regard, a Real Estate company cannot obtain less than a 3 out of 15, because a Real Estate company’s actions to contribute to climate change mitigation are limited: best players can reduce their exposition to almost nought but can only have a limited contribution to solving climate change issues. The worst player can obtain an 11 out of 15, as even the worst player has a limited contribution to climate change. 

More information about the Carbon Impact Analytics (CIA) methodology here. 

The intensity of leased assets (also called current performance) – Y-axis

To assess the performance of a given real Estate company, we first analysed the emissions related to the company’s leased assets. These emissions correspond to the Scope 1&2 of the company, including emissions related to the use of energy in common spaces and Scope 3 leased assets, which are emissions related to the use of energy by tenants. We divide the resulting emissions by the total surface leased (in square meters) to obtain an intensity in kgCO2 per square meter.

An intensity metric can easily be compared to the IEA’s projections which also use such ratios. It’s a powerful tool to compare companies with each other. 

Our methodology includes about 100 different types of real estate leasing depending on the location and the type of leased assets, providing a precise calculation of the company’s emissions. 

The results

By combining the intensities and Carbon Impact Analysis rating of more than 130 companies, we obtain the following graph: 

The X-axis represents the Carbon Impact analysis rating and the Y-axis the intensity (kgCO2/m2). On this graph, each dot corresponds to a company, its size corresponds to the total leased surface (m2) and the different colours correspond to the location of the company. 

Clear regional gaps appear

Clear packs of companies, depending on the region, appear in light dark: European countries tend to have better Carbon Impact Analysis Rating (X-axis) and better intensities (Y-axis) than their counterparts. There is quite a limited variation of intensities between the best and worst performer. North American companies’ intensity also has limited variation, but a higher average intensity and worse Carbon Impact Analysis ratings. Finally, it is more difficult to draw a narrative for Asian and Pacific companies, which have more volatile results compared to their European and North American counterparts. 

Most of the companies that have performed well on their Carbon Impact Analysis rating are European companies (on the left of the graph). Most European companies obtain a better rating than 8, corresponding to an insignificant (8) to a high contribution (3) to climate change mitigation. These good ratings are the result of a relatively low intensity of leased assets (also represented by the Y-axis) but also thanks to their performance regarding the past and future performances. In particular, the European companies outperform regarding their future performance, which accounts for about 40% of the final Carbon Impact analysis rating. 

Most American companies obtain an intensity higher than 30kgCO2e/sqm, which is higher than the world average intensity of buildings. This partially explains why these companies obtain a rather poor Carbon Impact Analysis rating. However, results are quite packed around the average: there are no extreme good or bad performers. 

When it comes to Asian and Pacific companies, is not possible to draw a clear common narrative. This is not surprising as these regions include very different realities. For instance, the region “Asia” includes Singapore, China, India or Japan, which have very different rules, energy mix or type of Real Estate assets. 

Why Europe stands out

One of the main takeaways of the previous graph is European companies standing out. They have better intensities and better Carbon Impact Analysis ratings than their counterparts. There is also less variability in the scores they obtain – most European companies are performing well, with very few outliers. 

A lower carbon intensity

This lower intensity of European companies is the result of different factors. Firstly, the electricity grid is much more decarbonised in Europe, meaning that the consumption of 1kWh of electricity (approximately 1 cycle of a washing machine) will generate less CO2 in Europe than in China. Regarding the energy mix, European buildings’ final consumption mix integrate more decarbonised or ready-to-decarbonise sources (such as biofuel or heat)^[2]. In Europe, district heating networks meet more than 8% of the heat demand, which comes mostly from renewables (up to 70% of district heating comes from renewables in Sweden for instance^[3]).

They may have other different factors that explain such intensity gaps, but they are harder to explain and not data backed. For instance, it may depend on the type of building and the average building size per region. And the bigger a house or a flat is, the greater is the energy consumption per square meter. Indeed, it requires more energy per square meter to heat a bigger room. There are also more appliances and more equipment per square meter when a place gets bigger. In Europe, house tends to be smaller than in the US^[4].

Legislation also makes a big difference. In Europe, the first legally binding construction laws were launched decades ago, and energy performance standards require companies to finance buildings with lower energy consumption. There is also a more philosophical point of view: in Europe, energy is mostly imported, meaning that the region is more dependent on world prices and fluctuations. This has forced Europeans to limit their consumption and build more energy-efficient homes. 

Better Carbon Impact Analysis ratings

European companies are also performing better regarding their overall climate performance (shown by the Carbon Impact Analysis ratings results). A full disclosure of the reasons why they tend to outperform can be found in this study. But there are some basic insights we can mention. 

Climate ambition paired with stringent regulations have pushed European companies to more transparency regarding their climate strategy, meaning that it is easier to calculate the carbon intensities of leased buildings. This makes a huge difference in the calculation of intensities, as they directly come from the companies’ reporting rather than being calculated based on regional data. Also, this transparency helped our analysts to better evaluate the company’s strategy, and that also made a difference compared to other regions, given that a lack of information about the company’s strategy was mostly considered an unambitious strategy. 

Globally, European companies’ strategies are more ambitious than their peers, with better governance on climate-related issues and better reduction targets. Again, legislation for climate change mitigation is generally seen as more ambitious in Europe, and there is also a higher consciousness among companies are the need for decarbonisation. Many European companies fix a threshold of energy efficiency for their newly acquired buildings. Moreover, they are supported by public subsidies to engage in energy refurbishment works, which are likely to be unprofitable. 

Want to learn more about it? 

The Carbon Impact analysis rating allows a fair comparison between companies within a same sector. It includes additional data, such as the analysis of climate transition plan, which evaluates the company’s understanding and contribution to climate change mitigation. If you want to access the complete data set, do not hesitate to send us an email!